Today I’m looking at two stocks with generous 6% yields. Both are slightly out of favour at the moment, providing us with a potential opportunity to lock in attractive long-term incomes.
Manx Telecom (LSE: MANX) is the main telephone, internet and mobile provider on the Isle of Man. It also provides international mobile services for customers who need high levels of roaming coverage.
The group said this morning that 2017 trading was in line with expectations, “with strong underlying cash flow continuing to support our progressive dividend policy”. This suggests to me that shareholders can expect a small dividend increase this year. Broker forecasts suggest a payout of 11.4p, which would give a yield of around 6%.
However, the emphasis on underlying cash flow is significant. Manx is in the middle of a transformation programme aimed at updating its services and business processes. I suspect this will pay off, but in the meantime it’s consuming cash. During the first half, transformation costs took £4.8m out of the firm’s underlying operating cash flow of £10.2m.
A wrong number?
This leads me to the only part of today’s trading update I was unsure about. The company says that full-year revenue should be broadly in line with last year, but warns underlying earnings before interest, tax, depreciation and amortisation (EBITDA) will be “moderately lower” than last year.
My reading of this is that it’s a borderline profit warning. Broker forecasts prior to today suggested a slight increase in revenue and earnings this year.
However, this spending is expected to start delivering benefits later this year. In my view this is a short-term headwind that should soon clear. I’m inclined to see this situation as a potential buying opportunity for dividend investors.
Great name, great income?
High street stalwart Marks and Spencer Group (LSE: MKS) was one of the weaker performers over Christmas. The group’s UK like-for-like sales fell by 1.4% during the 13 weeks to 30 December, due to a 0.4% fall in LFL food sales and a 2.8% decline in LFL clothing and home sales.
Although total food sales did increase thanks to additional store space, the company said it was forced to rely on price-cutting and seasonal lines before Christmas to “help late trading”.
My experience as a shopper is that M&S Food no longer has the premium appeal over regular supermarkets that it used to. If even I’ve noticed, then it’s unsurprising that in November’s half-year results the company said it would “increase the pace of … innovation” in its Food business and adapt its ranges.
Don’t be discouraged
Although M&S boss Steve Rowe faces some tough challenges, November’s interim results make it clear that this is still a profitable and cash generative business. Adjusted free cash flow for the first half of the year was £218.4m, roughly level with the group’s adjusted pre-tax profit of £219.1m.
What’s significant about this is that it highlights the retailer’s excellent cash conversion — turning profits into surplus cash.
If you share my view that the group should be able to solve its current problems, then I believe these shares could be of interest. With a P/E of 10.7 and with a prospective yield of 6.2%, Marks’ long-term income potential looks tempting to me.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Manx Telecom. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.